Sustainability and ESG: Four Reasons Why ESG Data Matters

More and more companies are accepting that they need to play a fundamental role in reducing greenhouse gas (GHG) emissions. According to the Science Based Targets initiative (SBTi), which advises companies around the world on how to set targets for GHG emissions reduction, the number of companies committing to these targets grew by 102% during 2023, compared to all previous years. And 113% more companies set targets during 2023 than 2022.

Statistics like these demonstrate how businesses are sharpening their focus on sustainability practices such as decarbonization and conservation of natural resources. They’ve become sensitive to evolving social norms and expectations for their behavior as “corporate citizens.” But they are also being pushed by the global expansion of ESG-oriented regulations mandating that companies measure and report on the impacts they’re having on society and the environment.

Making Sustainability Measurable Using ESG Criteria

ESG encompasses three main components: Environmental (E), Social (S), and Governance (G). Each of these dimensions provides information on how environmentally and climate-friendly a company is in its actions, how well it guards the health and safety of people and workers, or what management and control processes companies have in place. Today, ESG is arising as the global harmonized approach for companies to calculate and report their nonfinancial risks.

Here are four primary reasons why ESG data is becoming more important for companies:

1.  Increasing Regulatory Requirements

New regulations are being introduced around the world which oblige companies to push forward with sustainability and implement ambitious climate goals.

The European Commission, for example, is focusing on environmental and climate protection with its Green Deal. The concept aims at reducing net greenhouse gas emissions in the EU to zero by 2050. The Corporate Sustainability Reporting Directive (CSRD) from the European Commission will require companies to comply with new sustainability reporting from 2023. Considerably more businesses than before will then have to disclose their environmental, social and employee standards. In mainland China, too, there are goals to significantly reduce carbon emissions by 2060.

The Supply Chain Act obligates German companies to adhere to human rights and environmental standards throughout the supply chain. This aims to prevent child labor, environmentally harmful working and production conditions, and starvation wages. If businesses fail to perform their due diligence, they may face fines or be excluded from public contracts.

The U.S. Securities and Exchange Commission (SEC) adopted new climate disclosure rules requiring companies to publish information about the climate-related risks that are “reasonably likely to have a material impact on a company’s business or consolidated financial statements.” These new rules represent a dramatic change to the disclosures U.S. companies are required to make concerning the impact of climate change.  

2. Business Partners and Employees Demand Sustainability

Companies need to meet their social responsibility. It's no longer just a matter of making profit; the very purpose of the company is now under scrutiny. Banks and investors want to know how climate-friendly a product is in its production or whether employees receive a fair wage for their work. They are increasingly using ESG data to assess the viability of potential partners in a business environment that has begun to require more sustainable outcomes.

Those who can prove that their business model is sustainable more readily receive loans or better payment conditions. Negative press about exploitative working conditions can have the opposite effect and cause stock prices to plummet, as we have seen in the past.

Employees are also more aware of how sustainability is implemented within a company when choosing an employer.

 3. ESG Data for Better Strategic Decisioning and Risk Management

The major source of a company’s value today is not its real assets or its equipment, but intangible factors including intellectual property, brand equity, and reputation. From a reputational risk perspective, the potential damage done to a company’s image — and subsequently its revenue — by being caught up in a controversy originating with a counterparty is significant.

Increasing transparency around business actions means that what was previously not noticed or tracked is now very visible. This has pushed companies to put more pressure on their business partners, such as suppliers, because they know that consumers and investors often shun businesses that run into environmental, social, or ethical difficulties. Reducing risk is a key priority for procurement, so it's logical for procurement teams to help minimize potential risks to their own organizations from suppliers’ ESG challenges. 

4. Lower Costs and Increase Transparency Through the Targeted Use of ESG Data

Complying with ecological, social, and ethical factors also has a positive impact on the operating result. Closely examining ESG data makes it possible to identify potential for lowering energy costs, for example. It’s not just about complying with reporting directives or cultivating a better reputation and brand; ESG is a growing force for driving sales revenue and profits through innovation and healthier business networks.

ESG data ensures greater transparency. Based on this information, it is possible to determine the effects of ESG activities on a company's financial and operational activities to make targeted and profitable decisions for the future. Businesses can make proactive use of this to increase their own chances in the market.